Friday, December 9, 2011

Credit Suisse: "Two Top Picks in Fertilizers" (POT; MOS)

Credit Suisse
Despite the significant unease over the economy and European debt
situation, agricultural fundamentals remain positive in our view.

Grain prices are still at profitable levels for farmers, and we see
fundamental support for $5-plus per bushel corn prices looking out over
the next one to two years. Demand is solid with record high U.S. ethanol
production rates helping to offset sluggish U.S. corn export orders.
Low inventory levels leave little cushion in the event of adverse
weather conditions. At corn prices of $5 per bushel, farmers are
incentivized to plant more acres and apply optimal amounts of fertilizer
to maximize yields.

North American fertilizer stocks are more than factoring in potential
downside risks. Given the economic uncertainty, distributors are
exercising more caution and the lack of buying activity has lent a
bearish tone to the market. Nitrogen prices have plummeted, and the
Indians are requesting discounts on existing phosphate and potash
contracts.

However, we anticipate volumes and prices will hold up better than
the market expects due to favorable farmer economics, elevated costs for
marginal nitrogen and phosphate producers, and strong industry
discipline in potash. Based on valuations in the North American
fertilizer sector, we estimate the market is pricing in 30% price
declines and flat volumes for nitrogen, 30% price declines and 20%
volume declines for phosphate, and 15% price declines and 20% volume
declines for potash.

The risk/reward is most favorable for the potash and phosphate
sectors in our view as the market is already factoring in overwhelmingly
bearish scenarios.

Our top picks are Potash Corp. of Saskatchewan (ticker: POT) and Mosaic (MOS). The nitrogen names CF Industries Holdings (CF) and Agrium
(AGU) also look compelling as 2012 price expectations are overly
bearish with higher-cost Chinese product needed to meet demand. However,
with Chinese product not available until the country's low tax export
window in July and buyers deferring orders until the first quarter, we
see potential for nitrogen prices to fall further near term (potentially
towards Ukrainian cash cost levels), which would weigh on nitrogen
shares.